Bloomberg is reporting this week that investors and economists who think America is in for a bout of inflation are seeing “fresh ammunition for their arguments.”
That view is that the vaccines now hold the prospect of an end to pandemic restrictions and could bring consumers roaring back—and that pent-up demand could stimulate price increases. The incoming Biden administration likely will prop up household spending with more financial aid, the argument goes even as the dollar continues to weaken and commodity prices rise steadily.
However, the predominant view among economists – including, crucially, at the Federal Reserve – is that it will be some time before the U.S. has to worry about inflation.
Data due on Wednesday are expected to show that consumer prices increased 1.3% in 2020, and that in spite of rising costs for many producers the Fed's preferred measure won't exceed its 2% target even by the end of 2022. And Fed officials say they want to see inflation stay above that level for a while before they'll raise interest rates.
Inflation skeptics point to job markets still depressed by the virus and deeper trends in demographics and technology that keeps prices down, as well as the risk that politicians will cut off support for the economy too early – as they've done in the recent past.
So is inflation on its way back?
Bloomberg argues that policy settings just got tweaked even further toward the “run-it-hot” end of the dial. Fiscal spending has been the engine of recovery from the coronavirus slump and President-elect Biden – who's promising to do more of it – has a clearer path to getting his plans through Congress after Democrats won both Senate seats in a run-off vote in Georgia.
Americans are already spending more on goods than they did before the virus. If that's not yet the case with services, it's because lockdowns have taken consumer options off the table – something that should change as more people are inoculated.
Morgan Stanley economists expect “a sharp rebound in demand, especially in COVID-sensitive sectors like travel and tourism,” as vaccines get a wider rollout in the spring. They forecast that core inflation, which strips out the prices of things like food or gasoline because they're more volatile, will hit the 2% threshold this year and overshoot it in 2022.
Stimulus checks and higher unemployment benefits pushed household incomes up in the aggregate even as economic output shrank – a rare combination. And rising stock and housing markets helped add more than $5 trillion to the net worth of U.S. households in 2020.
Also, higher-income and older people, more likely to self-quarantine, have accumulated savings while waiting out the pandemic, says Mark Zandi at Moody's Analytics. They've missed out on things like trips to the hairdresser, vacations and meals out and they're “in an especially good financial position to ramp up spending on these services once they feel safe.”
Bloomberg's counter-argument is after 2008 the government and Fed also injected money into the economy, causing many to predict inflation that never arrived. Fiscal spending has been bigger this time, but so was the hole in the economy that it had to fill, so the result won't necessarily be overheating.
So far, this decade looks much like the last one, says Ben May at Oxford Economics. “Deficient demand has been countered by looser monetary and fiscal policy. This has boosted asset prices, but underlying consumer price inflation has remained weak.”
Another lesson from the financial crisis is that America's politicians aren't always the spendthrifts of popular caricature. They may actually suffer from the opposite bias. That's what happened after the 2008 crash, slowing the recovery. And a more tolerant view of deficits has taken hold since then.
In addition, even optimistic forecasters say it will be years before the U.S. is employing as many people as it was in 2019. A key lesson from the long expansion of the 2010s was that those resource market declines were deeper than previously thought.
That may be true for the post-pandemic economy too. Goldman Sachs, for example, raised its growth forecast after the Georgia election and now sees the economy expanding 6.4% this year – recouping all the COVID losses and then some. But it still doesn't expect core inflation to edge above 2%--triggering higher interest rates – until 2024.
Bloomberg also expects the “transitory” developments to ultimately be overcome by considerable economic slack.” Were it not for a collapse in labor participation related to the pandemic, the unemployment rate would be closer to 9.5% rather than the 6.7% last reported, levels that would considerably mute the rhetoric among the inflationistas.
But for monetary economists, higher prices only really count as inflationary when they stoke expectations of even higher prices in the future that generate momentum that is hard to control. That happened in the 1970s, Fed Chair Jerome Powell told reporters last month--but not more recently, and probably not this time, either.
So, we will see. Clearly, the fight against the pandemic will be central to what happens in the near future – and the economic debates and trends should be watched closely by producers as them emerge, Washington Insider believes.